Elitist Help for Business

As it becomes increasingly clear that the stimulus has failed, the president and his den of inexperienced elitists now conjure some new tricks, but from the same tired perspective .

Tax credits for research and development (R&D) are clearly and obviously not what the small business people need.  Of all of the hundreds of businesses that are my colleagues and customers very few have an accounting code for R&D.   It will take a very long time for any benefits from spending on R&D to reach the painters, carpenters, waitresses, salespeople, truck drivers, local news reporters, welders, accountants and most other workers in this economy.

Small businesses find lots of ways to improve their work, products, and services without any consideration of tax credits.   R&D is used by larger companies, often to develop labor saving manufacturing technology- just what we need with record stubborn unemployment.  Such tax credits represent the kind of incremental fine tuning a government bureaucrat believes creates jobs.

What about tax credits for new hires?  Those who decided to  keep steady employees often at great harm to their bottom line were usually the small businesses where the owners had to look into the eyes of workers that they personally associated with for twenty years.  Large public companies who were held brutally accountable to quarterly earnings had a much easier time dismissing workers. Guess who will benefit more from new tax incentives to hire or rehire?

The president stubbornly refuses to forgo  tax increases on the richest 3%, but as noted by Kevin Hassett and Alan Viard  in their WSJ Online article, The Small Business Tax Hike and the 97% Fallacy:

According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That's the number to look at, not the 3%. The president's plan to raise top marginal rates is holding back the very people who should be leading the economic recovery.

Ignorant of the real dynamics of American business these elitists target incentives to the segment of business that is already doing fine.  As long as the small business people are weary of deficits, higher taxes and onerous and uncertain regulations such micro incentives will do little except widen the gulf in income.

Businesses have been criticized by some for improving profits while not hiring or sharing their wealth with their workers.  The growth in profits is not likely equally shared and is most likely strongly slanted towards the larger companies who have better access to less expensive capital. Yet the larger source of new jobs are the smaller companies who have greater difficulty getting credit and have much less capability to absorb the onerous new regulations. One tiny change in the mammoth health care bill requires a change in 1099 reporting (having nothing to do with health care) that will increase their costs significantly.  While the larger companies may be doing better the smaller companies bear a much larger burden of this onslaught of radical legislation.

The benefits of a 100% write-off for capital equipment bought in only the year 2011 is not only short term it is short sighted.  Just the mention of it will cause me to delay any capital equipment purchases I am considering until next year.  It will have the same effect as the ludicrous cash for clunkers; a surge and then a drop off in demand for capital equipment.  While tax incentives matter we buy equipment to either cut costs or generate profits, not to play some stupid game for a single year's benefit. 

Milton Freidman observed that the "permanent income hypothesis" caused taxpayers to look beyond one time or short term stimulus and take into account how such factors as record deficits will affect their future or "permanent" incomes.  Freidman's academic jargon simply said that we are not as stupid and short sighted as the fools who govern us.

The solution has been tested and it works. Control spending to make the dollar sound, and cut taxes broadly.  It will increase the economy's ability to both consume and produce.  Tinkering at the edges while addicted to a class warfare scenario will not turn this economy around.


Henry Oliner